Downstream Ties Can be Crucial

Chuck
Davidson, chairman, president and CEO of Houston-based Noble Energy,
is breathing a little easier lately — the acquisition and exploitation
of international long life or "legacy" assets has enabled him to
jump off the E&P treadmill that previously saw his company reinvesting
90 percent of its cash flow just to keep its domestic production
flat.

Davidson,
who shared his experiences and advice during his luncheon address
at last fall's AAPG Prospect & Property Expo in Houston, now
has the luxury to plan strategic initiatives that will shape the
company during the next five years.

Best yet,
he has the cash on hand to implement these new initiatives — whether
it's an acquisition opportunity or increasing the company's position
in core areas.

Today,
Noble Energy's international legacy assets — projects with constant
production rates over a 20- to 30-year-long life cycle — represent
65 percent of the company's reserves. That's up from 28 percent
in 1998. Production from international properties has soared from
8 percent of the company's daily output in 1998 to 38 percent at
the end of the third quarter this year.

"We're
about to celebrate the fourth quarter that international will be
paying its way," Davidson told the APPEX crowd.

According
to him, it's not a question of "if," but rather "when" domestic
independents will seek out legacy assets in the developing world.

Citing
a changing business environment in North America's E&P sector,
Davidson laid out a compelling case for companies to expand their
operations worldwide — and to be competitive internationally, he
said E&P companies must:

Intimately
understand the downstream side of the energy business, enabling
them to take advantage of emerging regional markets for stranded
gas reserves.

Leverage
their core E&P business skills to find and exploit reserves
overseas.

Create
new and innovative business solutions to monetize stranded gas
reserves around the world.

Chuck
Davidson, chairman, president and CEO of Houston-based Noble Energy,
is breathing a little easier lately — the acquisition and exploitation
of international long life or "legacy" assets has enabled him to
jump off the E&P treadmill that previously saw his company reinvesting
90 percent of its cash flow just to keep its domestic production
flat.

Davidson,
who shared his experiences and advice during his luncheon address
at last fall's AAPG Prospect & Property Expo in Houston, now
has the luxury to plan strategic initiatives that will shape the
company during the next five years.

Best yet,
he has the cash on hand to implement these new initiatives — whether
it's an acquisition opportunity or increasing the company's position
in core areas.

Today,
Noble Energy's international legacy assets — projects with constant
production rates over a 20- to 30-year-long life cycle — represent
65 percent of the company's reserves. That's up from 28 percent
in 1998. Production from international properties has soared from
8 percent of the company's daily output in 1998 to 38 percent at
the end of the third quarter this year.

"We're
about to celebrate the fourth quarter that international will be
paying its way," Davidson told the APPEX crowd.

According
to him, it's not a question of "if," but rather "when" domestic
independents will seek out legacy assets in the developing world.

Citing
a changing business environment in North America's E&P sector,
Davidson laid out a compelling case for companies to expand their
operations worldwide — and to be competitive internationally, he
said E&P companies must:

Intimately
understand the downstream side of the energy business, enabling
them to take advantage of emerging regional markets for stranded
gas reserves.

Leverage
their core E&P business skills to find and exploit reserves
overseas.

Create
new and innovative business solutions to monetize stranded gas
reserves around the world.

"Here in
the United States," he said, "we're challenged if we can even pull
together a few thousand acres of land."

He characterized
domestic independents as "typically active drillers and exploiters
of hand-me-downs from the majors" — adding, however, that there
are limited properties available today from the majors.

"The North
American gas market is changing rapidly," he said. "The bad news
is that we (as an industry) have not been able to build supplies
as we had hoped."

Focusing
on "the good news," Davidson listed the following reasons driving
domestic independents to expand globally:

Significant
acreage.

Less
competition.

High
growth/high return opportunities.

Political
risks are manageable.

Regional
gas markets are growing.

Opportunities
can be "company makers."

New Skills
Required

Making
the transformation from a domestic independent to a competitive
international energy company requires a whole new set of integrated
skills, according to Davidson.

"Even if
you choose not to participate in the downstream, it's critically
important that you understand it," he said.

As a country
develops or modernizes, its appetite for power grows in parallel;
natural gas offers an environmentally friendly and generally cost-effective
solution to an emerging nation's energy needs — especially if the
gas already has been discovered.

"What may
have been viewed as stranded gas a couple of years ago may be monetized
today," Davidson said. "Timing is everything. The regional gas markets
have developed."

In
Ecuador, for example, Noble Energy created a downstream gas market
to tie in a stranded gas field sitting offshore in the Bay of Guayaquil.
The Amistad natural gas field represented an historical asset that
no one wanted to tie in.

With a
$250 million investment, Noble Energy constructed an electric power
plant onshore, installed a drilling and production platform offshore
and built a 40-mile-long pipeline to transport the gas. During the
next 20 years, Noble Energy will transport approximately 13 Bcf
of gas per year to the power plant onshore.

Ecuador's
energy comes primarily from hydro-electricity. During the dry season,
however, the country needs supplemental power — that's when Noble
Energy's plant is base-loaded to operate at 100 percent capacity.

Wholly
owned by Noble Energy, the 130 Megawatt, twin turbine plant provides
10 percent of Ecuador's current electricity needs. With additional
capital expenditures, the plant can ramp up to a 220 Megawatt capacity.

Other examples
of the company's monetizing stranded gas:

Offshore
West Africa, in Equatorial Guinea's waters, where Noble Energy
has monetized a stranded gas asset in the Alba natural gas and
condensate field, containing one billion BOE of gross proven and
probable reserves. Noble Energy has a 34 percent interest in the
field, plus a 34 percent interest in another discovery, the Estrella
#1, just north of the Alba field.

Adjacent and onshore,
Noble Energy owns a 45 percent interest in the methanol plant
that produces 20,000 barrels daily for export as a petrochemical
feedstock. Noble Energy built the plant at a cost of $450 million
— capital expenditures were shared with Marathon Oil, the company's
55 percent interest partner.

Daily production provides
3 percent of the world's methanol supplies. According to Davidson,
the plant produces the second lowest-cost methanol in the world.

"We monetized and
created value from our upstream resources," Davidson said. "We
had to understand methanol markets — methanol is priced off of
North American gas."

Three-and-one-half
years ago, leveraging on its success and operating experience
in the Gulf of Mexico, Noble Energy obtained 11 licenses offshore
Israel. Noble Energy operates the blocks, with a 47 percent working
interest.

Davidson got animated
when he described "wildcatting" in the Mediterranean Sea: Noble
Energy has discovered two significant gas fields, with reserves
totaling 1.1 Tcf of natural gas.

Noble Energy and
its partners have secured an 11-year contract to supply natural
gas to the Israeli Electric Corp. Beginning in early 2004, the
joint venture will supply 170 MMcf per day of gas for electrical
power generation.

Tie in of the second
field will enable Noble Energy and its partners to produce 600
MMcf per day at peak rates.

Noble Energy moved
quickly to monetize its success — from wildcat exploration
to shipping sales gas in under four years — in a country with
no market, no gas resources and no infrastructure.

Compromising
Positions

Davidson
described how Noble Energy has had to make some "compromises" in
its domestic operations in order to pursue international opportunities.

Prior to
going international, Noble Energy had been spending about $300 million
annually in the Gulf of Mexico (GOM). The company subsequently slashed
spending in the GOM — it also shifted the exploration focus from
the mature, shallow continental shelf to the deep continental shelf
and deepwater plays to take advantage of lower operating costs,
larger prospect sizes and higher impact opportunities.

Noble
Energy's capital expenditure (CAPEX) budget for 2003 is $510 million:
international operations represent 55 percent of the total CAPEX,
with 30 percent carved out for the GOM and the remaining 15 percent
allocated to onshore United States. International operations —
all offshore with the exception of Argentina — include China, Vietnam,
the North Sea, Ecuador, Equatorial Guinea and Israel.

Noble Energy's
reserves of 463 million BOE are comprised of 57 percent natural
gas. The company's production of 100,000 BOE per day consists of
70 percent natural gas. With a market capitalization of $2.3 billion
and an enterprise value of $3.2 billion, Noble Energy has deeper
pockets than most independents, which positions the company to weather
the long lead times required for investment in the developing world.

While Noble
Energy continues to explore domestically for long-term production
in the GOM, the Mid-Continent and the Rocky Mountains, its sights
are set on new opportunities — and emerging markets — in the developing
world.

"It's been
an interesting ride with long lead times," said Davidson. "The benefits
far outweigh the challenges."